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airBaltic - The big airline from the small country

Airliner World magazine reports on the airline’s plans to be a force in European skies following Latvia’s entry into the European Union.

10-Aug-2010

As one of the youngest, and smallest, of the world’s national carriers, Latvian airline airBaltic was quick to modify its business structure to meet with changes in market conditions after 9/11. While other airlines struggled, this company bucked the global trend, reporting its first profits and witnessing a growth in passenger numbers and loads. This had not always been the case – when the airline entered the new Millennium it had endured five unprofitable years. In 2002 German-born Bertolt Flick took the hands-on role of President and Chief Executive Officer - he previously held the position of Chairman of the Board having been instrumental in the airline’s formation and launch. With Latvia taking its position as a formal member of the European Union on May 1, 2004, airBaltic expanded its presence in the Baltic and wider European markets.

Background
After gaining its independence from the former Soviet Union in August 1991, it was essential for Latvia to establish international trade links. The country’s first national airline, Latavio, was established using a mixed feet of Antonov and Tupolev models inherited from the former Baltic regional directorate of Aeroflot. With such a small population base and high operating costs, the airline was unable to generate sufficient traffic to become a successful concern and despite investment from the state, it was operating at a significant loss. With the company close to bankruptcy, the Latvian government looked at alternative ways of establishing a strong air transport operator and after studying the possible privatisation of the carrier, it decided to establish a brand new operator from a partnership deal between the state and various foreign concerns. Bertolt Flick acted as a third party consultant on the formation of the airline, corresponding directly with the Latvian government, and in August 1995, airBaltic became the republic’s new flag carrier. The result was a venture between the Latvian government, US-based Baltic International, Scandinavian Airlines System (SAS) as well as Danish and Swedish investment funds. The new concern took over the route licences and ground facilities of its predecessor, Latavio and fellow local carrier Baltic International from October 1 after the transport ministry had grounded the operations of the heavily-indebted former national carrier just a day earlier.


The Saab 340 played an important role in the airline establishing regional flights from Riga, launching services to Stockholm in Sweden on October 1, 1995. Saab image
Launch
A major factor in the Latvian government’s plan was to establish a modern generation airline offering regular services to hub airports in Europe and Scandinavia. A conscious decision was taken therefore to distance airBaltic from Latvia’s former communist links and to try to offer high quality standards similar to those already available in Western Europe. Consequently, it was decided not to operate any of its predecessor’s Soviet-built fleet choosing instead to acquire a mix of new and second-hand Western-built types. “It was an absolute prerequisite for us and the Latvian government as we wanted to establish airBaltic as a modern and safe airline,” said Bertolt in 2004.

With such a small local demand, the airline targeted the 70-seat market for its launch after identifying that 100-seat aircraft were too large for its proposed operations. After studying the Fokker 70, Douglas DC-9-21/41 and BAE Systems RJ70 Avroliner, a formal decision was made to acquire three of the British-built Avros for delivery during the first year of operations. “We secured an excellent deal for the aircraft, which were all brand new airframes,” said Bertolt. It took delivery of all three during the first half of 1996, although the third aircraft was outsourced to other carriers, including National Jet Systems in Australia, Air Nuigini, AzzurraAir in Italy and Druk Air, the national airline of the Himalayan Kingdom of Bhutan.

The new national carrier launched operations on October 1, 1995, initially linking Stockholm with Riga using one of two Saab 340s acquired for ‘thin’ routes. The first RJ70s were due for delivery early the following year, so airBaltic initially utilised Baltic International’s former fleet until the end of 1995 and later wet-leased a single BAe 146-200 from Manx Airlines of the UK. Although Baltic International had operated Tupolev Tu-134s, airBaltic only utilised its two Boeing 727-100s, which makes it the only flag carrier from the former Soviet Union to exclusively operate western equipment.

Restructuring
During 1996 and 1997 airBaltic gradually established a strong regional network in Eastern Europe and Scandinavia. Alongside important links to the Copenhagen and Stockholm hub airports of its partner airline SAS, airBaltic opened new routes to the neighbouring states of Estonia and Lithuania as well as international links to Belarus, Czech Republic, Poland, Russia and Ukraine. Although loads were not high, they were showing positive growth, and in November 1998 the airline began a partial fleet reorganisation introducing the Fokker 50 for services to Copenhagen, Stockholm and new flights to Hamburg. It then took the bold decision to replace its two leased Saab 340s with the larger 46-seat turboprops to provide additional scope for growth on short- and medium-range routes.


Until 2004 the Avro RJ70 was the largest aircraft operated by airBaltic. BAE Systems image
The introduction of the larger type played a significant role in the development of the airline’s route structure as it was not really suited to some of its shorter, thinner routes that had been previously served by the Saab 340s. “The aircraft was too big to fly to Vilnius, Tallinn and Minsk, which were excellent Saab 340 destinations. However, the capacity of the Fokker created new opportunities for airBaltic enabling the carrier to greatly expand its presence in Finland and Sweden and to operate these routes at profitable levels,” said President and former Chief Executive Officer Kristian Kircheiner. According to the airline, the move was a brave and expensive operation but proved to be crucial to its growth as it is doubtful that the carrier would be in its current position had it continued to serve Stockholm with its Saab 340s.

Although Latvia was trying to distance itself from its historical links with the Soviet Union, its development was still strongly linked to the Russian economy and a crisis in Russia and the resultant economic decline of the late 1990s caused concerns over the long-term future of the Latvian carrier. “After years of steady growth, passenger numbers stood still and we were forced to look closely at our business plans, taking some tough decisions to cut destinations and to concentrate on profitable routes,” said Bertolt.

As a result of a rationalisation, some services were axed, principally those to Minsk, Warsaw, Prague and Moscow, enabling the airline to concentrate on its profitable trunk routes from Riga to Budapest, Copenhagen, Frankfurt, Helsinki, Kiev, Stockholm, Tallinn and Vilnius. According Kristian Kircheiner, the consolidation did not stop there –the company reviewed every single cost item, ranging from the lease terms on its fleet of aircraft right down to the coffee and cream served on board.

Profits
This widespread restructuring proved to be successful and as airBaltic prepared to celebrate its fifth anniversary in October 2000, it was confident that it had overcome its problems. In those five years the airline had come a long way, as had Latvia, thanks to strong foreign investment from Germany and improving links with Scandinavia. However, the carrier had not been able to make a profit during this period. With all aspects of its cost efficiency programme in place for the 2000 financial year, the airline began to turn the corner in April, as increased demand, coupled with fewer flights, greatly improved the load factor. The year ended with airBaltic recording its first positive operating result and full profitability followed in 2001, with a gain of 56,000 Lats ($103,000) after tax.


The airline took delivery of its first Boeing 737-500 in November 2003. Key - Tony Dixon
The restructuring had seen the airline turn itself into a much leaner structure and this placed it in a good position to overcome one of the most significant downturns to ever hit the airline industry. Although airBaltic – in common with most other carriers – was hit hard by the market downturn post-September 11, the earlier rationalisation meant that it was well positioned to overcome the crisis. “The restructuring had taken place at just the right time for us,” said Bertolt. “Fortunately, the Latvian economy did not suffer as heavy a blow as America, Europe and other countries did post September 11, 2001,” he added.

New business model
The events of September 11, 2001, changed the structure of the airline industry forever and airBaltic changed its business model to meet those market needs. “The big companies were suffering losses, while so-called low-cost airlines were continuing to expand their operations. At a time like this, we needed to respond to the market requirements,” said Bertolt. This was first achieved through the launch of a new Baltic Shuttle product, offering high-frequency services to neighbouring Tallinn and Vilnius and the Finnish capital Helsinki, with frequent flights at reasonable rates.
In the first stage of its redevelopment, airBaltic positioned itself in the market place somewhere between the full service and no-frills carriers. With the advent of low-cost travel making flying as common as transportation by coach, ferry and train, the carrier took the bold move to offer a simplified one-way fare structure and devised a new catering model on board its aircraft. From April 2003 – and starting initially with its established routes to Berlin and Hamburg – the previous ticketing restrictions were replaced by a more straight-forward fare structure. “This new pricing model was much simpler from the passengers’ viewpoint than the traditional pricing models,” said Bertolt. “Under this structure there are no travel conditions: time of travel, Sunday rule, duration of stay or advance purchase.” Having secured good customer feedback on the two routes, the system was expanded to cover flights to Helsinki, Vienna and the other Baltic states, and was introduced on all of the airline’s new services.


Latvian dancers painted on airBaltic's fleet at Riga.
Alongside the new fares, airBaltic also introduced a dynamic advertising campaign and as part of this its aircraft were used to help increase the carrier’s exposure. Breaking from the traditional marketing approach adopted by other airlines, airBaltic began to paint the fuselages as if they were flying billboards, advertising its low fares, using images of fruit and then birds to support the message. “With this campaign we were saying that flying is a joyful experience and serious matters can be handled with a smile,” added Bertolt. A later adaptation of this theme saw the aircraft painted with dancing ladies in different coloured dresses.

However, perhaps the boldest move was to give passengers the choice of paying a higher fare for a full cabin service or a lower fare with the option to purchase food and drink on board. This idea has worked well for the growing number of low-cost airlines, and is one of many traditional approaches being revised by some of the newer-generation carriers like airBaltic.

Fleet and network growth
During 2002, the airline embarked on the first stage of a network expansion programme as it prepared for Latvia’s eventual entry into the European Union. New services were launched to Berlin and Vienna, and former routes to Moscow, Prague and Warsaw were relaunched – the latter two being operated under a full codeshare partnership with CSA Czech Airlines and LOT Polish Airlines respectively. “All five routes opened in 2002 were successful and their results exceeded our expectations,” said Bertolt. During 2003 Brussels and Minsk were added to the network.

Alongside the network changes, airBaltic introduced larger aircraft to its fleet with the acquisition of four Boeing 737-500s on lease. These 120-seat aircraft offered greater range than the airline’s existing RJ70s and Fokker 50s, and were used to open up additional European routes. “The introduction of the Boeing to our fleet gave us the flexibility to operate longer flights and allowed us to remain competitive even if ticket prices continued to fall,” said Bertolt. The aircraft are configured in a two-class, 120-seat cabin, with a moveable curtain divider and fitted with new leather seats throughout.


airBaltic operated a fleet of avro RJ70s, Boeing 737s and Fokker 50s in 2004.
European membership
In the past airBaltic was restricted in its growth by many bilateral agreements. With Latvia’s entry to the fully liberalised European market and the open skies agreement, the airline was able to operate on any routes between any two cities in Europe. “Joining the European Union on May 1 fundamentally changed the rules of the aviation market for the new member states. This meant new challenges and opportunities for airBaltic,” explained Bertolt. “We prepared the airline for the opening of the market for two years, restructuring the company and the fleet. The opening of the market meant that, within EU countries, there were no longer any capacity restrictions and most importantly no regulation of fares. It is only natural that we would expand operations.”

The airline was quick to take advantage of these new opportunities and on June 1, 2004 opened a base in the Lithuanian capital Vilnius, transferring a single Boeing 737-500 and two Fokker 50s to its neighbouring country. “Our aim was to offer regular air transport between Vilnius and Europe’s major cities, with prices that were competitive not only with other airlines, but also with the prices of bus, car, train and ferry transport,” said Bertolt.

The strong relationship with SAS, which sees each aircraft in airBaltic’s fleet displaying ‘Well connected with SAS’ titles prominently on the forward fuselage, has been a major factor behind its recent success. “SAS have been absolutely crucial to us,” explained Bertolt. “They were a major factor behind our return to London by loaning us slots at Heathrow and also with our Vilnius plans.” Due to its location he believes that Lithuania was always a natural choice to support the growth of airBaltic and SAS had a good understanding of the market having been one of the many parties studying the proposed privatisation of Lithuanian Airlines.

When airBaltic celebrated its fifth anniversary in 2000 a senior executive at the airline suggested that it was “the small airline from the small country” and that it would be reluctant to launch operations into hostile environments. Now it is competing with the European majors on routes to Amsterdam, Brussels, London and Milan. It appears the small airline is growing up and has just got bigger.

For the latest news on airBaltic, see the September issue of Airliner World magazine, on sale from August 11.

Filed Under Commercial Aviation Features.

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